Relationships Are Archard’s Focus

Relationships Are Archard’s Focus

Author William Arthur Ward, who spun hundreds of inspirational maxims, once wrote “The pessimist complains about the wind; the optimist expects it to change; and the realist adjusts the sails.”

The project and breakbulk shipping industry is witnessing a change in trade winds, with rising oil prices and the return of business, and executives and analysts are throwing caution from “cautious optimism.”

Justin Archard and SAL Heavy Lift GmbH, while acknowledging the growing momentum, are opting for the realist approach.

However, he’s not taking for granted the depth nor the sustainability of an industry rebound.

“We can prepare for everything, we can talk to each other, we can make all the plans you like, but if the macro environment goes against us — it can and it will — it won’t make any difference,” he said in an interview from the sidelines of Breakbulk Americas in Houston.

Archard had earlier participated in a panel session with carrier and engineering, procurement and construction, or EPC, executives, where participants spoke positively about prospects for the market and for shipper–carrier relationships.

“It was nice to finally sit on the stage where even the demand side are willing, finally, to say ‘times are a-changing,’” Archard said. “We’re going to have to adapt to this new environment. At the same time the supply side is still reorganizing and tightening the carrier pool, to take advantage of what we see is going to be a rising market, a rising tide.”

New Cycle

In some respects, it’s not merely seeing project cargo shipping as a glass half-full, it’s acknowledging that the size of the glass has changed.

“There’s one really big difference between the beginning of the last cycle and the beginning of this cycle. The last cycle we had a very small industry. My former employer, Jumbo, we were at 14 ships and we were the biggest player in town,” Archard said. “Nowadays, of course, 100 ships, 150 ships is what you’re seeing.”

So, larger carriers; but another change is emptier pockets.

“While we’re talking optimistically about a good market, we’re all still carrying the last 10 years with us, and those last 10 years have been ruinous for many others. It will be a long time before we see a lot of those balance sheets corrected,” he said, adding it still may not be enough for some carriers, depending on how long or how high the upcycle occurs.

These same carriers have been deferring maintenance and repairs on ships, which means the question of fleet renewals, let alone expansion, will be forced sooner than anticipated.“Bad maintenance means accelerated aging. So we may see in the next few years some vessels that were built to last 20-25 years only making 15 to 17 before they hit the beach … that will be another driver of the new and changing supply and demand curve,” Archard said, adding SAL has been “very, very careful to maintain a very high level of investment.

“There’s no money in the business. The access to capital for fleet renewals and fleet expansions is just not there,” Archard said. “The KG system went bye-bye and we’ve seen a lot of the North German banks, which traditionally – or at least in the last cycle – were the expansionary facilitators, are not there anymore. And so the access to capital is simply not there.

“All of which would mean in the 2020s there could be a really difficult supply/demand of ships.”

Digging Out

Admittedly “partly tongue in cheek” to emphasize his point, Archard said: “Freight rates need to double in the next year or so to get us back into a position where we can start to meet all of our operating expenses comfortably in order to actually make money to reinvest. That’s the part we’ve been missing for so long.”

Throughout history, supply/demand cycles in the ocean shipping industry have occasionally brought out the worst in carriers and shippers and forwarders. However there was a unity among shipping partners at Breakbulk Americas, and Archard expects the climate to last.

“For a year or two we’re going to be holding hands” with EPCs and forwarders, he said. “I think we’re going to work very well with each other. A rising market benefits us, but it benefits them as well. The relationship will be healthy and collaborative and will be a nice place to be.”

But, if ship scrapping begins anew, or if fleet renewals and expansions are slow in coming, as Archard suggests, hostilities could return.

“There are still too few ships and too many cargoes. That would bring stress to any relationship. … We don’t like having to say no to people, but if it gets to the point where it’s too strong … that of course is going to be difficult.”

Archard said SAL would continue to emphasize customer relationships and stress quality service. “Those shippers that supported us in the bad times will always be supported in the good times. That’s just the way relationships work.

“But on the other side, ship owners are optimistic by nature, as it is human nature to be that way. We’ll have to strike a balance between maintaining very, very close relationships with our customers, but also look for the opportunities where they are. We will be searching for those once-in-a-lifetime type of deals because they do come around every high cycle.”

IMO: Full Steam Ahead

Before carriers can approach fleet renewal, they have more pressing investment decisions, brought by the implementation of the International Maritime Organization’s low-sulfur regulations, which take effect Jan. 1, 2020.

While some carriers have lobbied IMO to extend the deadline, neither Archard nor his company are expecting IMO to defer implementation.“It would be suicidal of the IMO or any other regulatory body to simply say, ‘we’ll give it one more year’ … It would bring chaos into the community,” he said. “I’m sitting here as an English person and I see this with Brexit as well. How ever little we know about what’s going to happen; we know that it’s going to happen. And yet we will get on with it one way or another.”

Archard estimated it would cost about €2 million per ship to convert to scrubbers; otherwise a ship would have to burn low-sulfur bunker. “We’ve got 20 ships. It’s also coming at a time when there’s not a lot of money around to do the things we need. So we have to be selective. One vessel type would benefit from scrubbers and be quite marketable as well.”

SAL’s fleet comprises five vessel types, all geared, ranging from 8,919 to 12,500 deadweight tons. All burn different amounts of bunker, and are different ages and designs, which impacts how costs are calculated, he said. That impacts the decision on investment.

“There has to be a genuine and appreciable gain for it to be worthwhile. The return on investment has to be relatively short for it to be tolerable. If it’s five years, that’s an incredible burden on your company. If it’s two years, then you’re getting down to a manageable area,” he said.

An investment in scrubbers would benefit those ships that burn the most, he said. “Eco carriers and guys that are doing less than 20 tons a day are going to find the return on a €2 million investment being a lot longer. It kind of drives the debate on how many of the MPV vessels in the world are actually going to convert to scrubbers,” he added.

SAL Fleet

SAL traces its history back to 1865 when the Heinrich family took delivery of its first sailing vessel. It remained family owned until “K” Line became its sole shareholder in 2011, four years after entering into a joint venture with SAL.

It was renamed SAL Heavy Lift GmbH in 2012, relocated to Hamburg and entered the offshore market with a subsidiary in 2013. SAL was acquired in 2017 by the Harren & Partner Group, which maintained the company as its own brand and has sought to increase the fleet.

“We’re at 20 ships today, and we were at 16 ships at this time last year,” Archard said. “As we sit here next year we will have more ships again.”

Unlike major MPV carriers like Zeaborn and BBC Chartering, which have aggressively expanded in the market, SAL is not far from its ideal fleet size, Archard said.

“We have no ambition to be a 50 … 60 … 100-ship company. We still want to be a very, very highly service-oriented company, with a very high level of quite expensive resources to maintain,” he said. He anticipated between 20 and 30 vessels would fit its business plan.

“The reason we need to expand is we need to develop enough margin on TCEs (time charter equivalents) to be able to pay overheads … If you’re only making US$1,000/day on 15 ships it doesn’t take you very far. You’ve got to find your sweet spot with economies of scale that actually provides you the margin to deal with your overheads,” he said.

Gary G. Burrows has served as a business editor and journalist for more than 30 years, focusing on global supply chain logistics, customs and regulatory issues across all shipping modes.

Photo: Harren & Partner Group

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